Paul Schaus, CEO at CCG Catalyst, a bank management consulting firm, argues in American Banker that banks’ investments in blockchain technology will come to full fruition in several years due to regulatory uncertainty, but it will provide some benefits short term in improving internal operations. He argues that banks must have realistic and long-term expectations.
Schaus noted that an IMB survey of 200 global banks indicated 15% will introduce blockchain-based products next year, and 65% will have them in the next three years.
Expectations Must Be Tempered
Banks have to temper expectations about their returns from blockchain technology because regulatory uncertainty will cause banks to first use the technology for internal purposes that most likely will not involve money transfer.
Early blockchain deployments will involve transferring data for know your customer (KYC) rules, compliance reporting, trade finance and loan documentation. Such projects will not deliver full blockchain benefits.
Maximizing the value from blockchain technology will require leveraging numerous market participants that will share the cost of operating and building the network. Collaborations will be needed to leverage blockchain technology for transactions among participants.
Such use cases could save banking $20 billion annually from removing central authorities and clearing mechanisms, Schaus noted, citing a 2015 Santander report.
Challenges exist before such applications emerge, a process that could take more than a decade.
The shorter-term benefits pertaining to data referencing and compliance reporting will be important. Such benefits include improved accuracy in reporting and better customer satisfaction from faster information processing.
To achieve these shorter-term benefits, banks will need to allocate resources to run the applications. These costs will increase as banks scale these applications across different divisions and business lines.
There will be cheap computing power available from cloud-based services like Microsoft Azure and IBM’s cloud-based blockchain-as-a-service.
Banks will also need to integrate these products with legacy systems. Over time, banks will learn to meet blockchain challenges at a minimum cost.
None of the challenges are impossible to solve, Schaus noted. Banks and other organizations are already working on all the challenges.
Image from Shutterstock.